Moody's cuts Reliant Resources to junk

Moody's Investors Service downgraded Reliant Resources, Inc. three notches to junk, lowering its issuer and bank loan ratings to Ba3 from Baa3 and Orion Power Holdings senior unsecured bonds to Ba3 from Ba1. Reliant Energy, Inc.'s senior unsecured debt and bank loan ratings were cut to Baa2 from Baa1 and Reliant Energy FinanceCo II LP's senior unsecured debt and bank loan ratings to Baa2 from Baa1. All ratings are on review for possible downgrade including Reliant HL&P senior secured at A3, Reliant Energy Resources Corp.'s senior unsecured Baa2 and P-2 commercial paper rating and Reliant Energy Mid-Atlantic senior secured at Baa3.

Moody's said it lowered Reliant Resources because it considers the company's cash flow from operations is unpredictable relative to its debt load and that its financial flexibility is limited.

The company needs to refinance approximately $2.9 billion of bridge bank debt maturing in February 2003 and $800 million of the $1.6 billion corporate revolver which matures six months later, Moody's noted.

Ratings on both Reliant Resources and Orion Power Holdings had assumed the refinancing of the secured bank debt at Orion Midwest and Orion New York and this has not occurred, Moody's said.

The near-term outlook for Reliant Resources' wholesale business is poor, driven by depressed wholesale prices both here and in Europe, constrained capacity markets, and poor credit conditions in the energy trading sector, all of which will pressure margins and challenge Reliant Resources' ability to generate stable cash flow from operations, Moody's said.

S&P raises iStar outlook

Standard & Poor's raised its outlook on iStar Financial Inc. and its TriNet Corporate Realty Trust Inc. subsidiary to positive from stable. The rating agency assesses the corporate credit quality of both companies at BB+.

S&P said the outlook change reflects iStar's strong asset-quality performance, demonstrated through both a weak economic environment and a difficult real estate market; substantial capitalization of $1.9 billion in equity; and continued efforts to term out its debt structure.

iStar has continued to reduce marginally the credit risk in its credit tenant leasing (CTL) portfolio, and its mortgage portfolio has performed well since Sept. 11, 2001, and through the current weak economic environment and volatile real estate market, S&P said.

Nevertheless, the ratings continue to reflect the risks inherent in a monoline commercial real estate company, S&P added. The company's real estate exposure to New York properties remains a concern, as well as concentrations in office properties and the West coast.

While the company's non-accrual list is short and the company has not experienced a charge-off in its entire history, there are a number of credits that iStar is monitoring that may pose a potential future problem, S&P added.

S&P also said it is concerned about iStar's high level of secured debt, which would structurally subordinate the unsecured bondholder. It would be prudent for iStar to continue to raise unsecured debt in the capital markets, thereby increasing the ratio of unsecured debt-to-total assets and unencumbered assets-to-unsecured debt.

S&P cuts Petroleum Geo-Services to junk

Standard & Poor's downgraded Petroleum Geo-Services ASA to junk including lowering its $360 million 7.5% notes due 2007, $200 million 6.625% senior notes due 2008, $450 million 7.125% senior notes due 2028, $250 million 6.25% senior notes due 2003 and $200 million 8.15% senior notes due 2029 to B+ from BBB-. The outlook is negative.

S&P said the downgrade is in response to the withdrawal of support for the merger with Veritas by Veritas' board of directors, Petroleum Geo-Services' inability to complete key asset sales, the impact of ratings triggers on the company's liquidity and the probability that additional secured debt enters the company's capital structure.

Petroleum Geo-Services' ratings may be further downgraded as the company faces considerable refinancing risk in 2003, S&P said.

Before Petroleum Geo-Services' November 2001 agreement to merge with Veritas its ratings had been downgraded from higher levels due to poor industry conditions and bad investment selection by Petroleum Geo-Services' management, leaving the company weakly positioned in its BBB- corporate credit rating, S&P said. The merger with Veritas had been expected to improve Petroleum Geo-Services' ability to compete by cutting costs, reducing capacity and increasing pricing power.

The outlook for seismic services now is less certain. While the company's seismic backlog has remained fairly strong throughout 2002, free cash flow generation in the second half of 2002 depends on continued data library sales, which can be volatile, S&P said. Furthermore, revenue visibility in 2003 is far less clear. A weakening of either of these businesses could be a catalyst for a ratings downgrade.

During the seismic industry downturn, Petroleum Geo-Services' production operations have provided free cash flow that has helped to fund the seismic operations. However, these operations still confront material risks during the next year, S&P said. Petroleum Geo-Services' Varg FPSO is producing on a field that is nearing depletion, which could cause that asset to face redeployment risk during 2003 or 2004.

Petroleum Geo-Services is aggressively leveraged, with total debt to projected 2002 EBITDA of about 4.4x and projected EBITDA interest coverage of about 3.8x, S&P added. Complicating Petroleum Geo-Services' financial position is material refinancing risk in 2003, when a $250 million bank loan (June), $430 million revolving credit facility (September), and $250 million note offering (November) come due. Ratings triggers in the company's lease obligations could cause Petroleum Geo-Services to post $55 million in cash collateral, triggers in the company's multiclient library securitization will increase the quarterly redemption rate by 30% and require the repurchase of certain data, and provisions in the company's $250 million bank loan due June 2003 have increased the company's interest rate on that financing, further draining financial resources, S&P said. However, Petroleum Geo-Services expects to generate at least $100 million of free cash flow after capital expenditures in 2002, which would augment liquidity.

S&P puts Avaya on watch

Standard & Poor's put Avaya Inc. on CreditWatch with negative implications including its secured debt and unsecured debt at BB-.

S&P said the action is in response to Avaya's continuing weak operating performance and the rating agency's concerns about financial flexibility stemming from ongoing cash-based special charges and potential covenant amendments.

In its announcement of earnings for the quarter ended June 30, 2002, Avaya indicated the prospect for additional softening in demand among enterprise customers for its communications products, S&P noted.

S&P had expected sluggish business conditions to persist for Avaya but said sequential declines in quarterly revenues and contracting EBITDA have resulted in debt protection measures that are sub-par for the rating level.

The company said that EBITDA was $39 million for the June quarter, down from $90 million in the quarter ended March 30, 2002, S&P said. While Avaya has not indicated that it is at risk of covenant violation, it did state that it is in talks with creditors to amend its existing covenants.

In addition to operating performance, S&P said it is concerned additional cash-based charges, outlined in a press release by Avaya on July 26, will put further pressure on its cash balances. Avaya will incur $125 million to $135 million of cash charges, to be paid out over the next several quarters, for reducing headcount and consolidating facilities.

S&P raises New World Pasta's bank loan to B+

Standard & Poor's upgraded New World Pasta Co.'s corporate credit rating to B+ from B, bank loans to B+ from B and $160 million 9.25% senior subordinated notes due 2009 to B- from CCC+. The outlook is stable.

The upgrade reflects improved operating performance due to continued sales volume growth, strong market share and ongoing cost-saving initiatives, S&P said.

Ratings reflect challenging industry conditions and high debt leverage, offset by leading market position and good product portfolio diversity, S&P said.

Rolling 12-month total debt to EBITDA for the period ending March 30, 2002, was 5.1 times and EBITDA to interest for the same time period was 2.1 times.

S&P takes Veritas off positive watch

Standard & Poor's confirmed Veritas DGC Inc.'s ratings and removed them from CreditWatch with positive implications. Ratings affected include Veritas' $135 million 9.75% senior notes due 2003 at BB+. The outlook is stable.

S&P said the action follows termination of the merger with Petroleum Geo-Services ASA.

The combination of Veritas and Petroleum Geo-Services was expected to benefit the industry by reducing the competitive landscape to two large players, S&P said.

The rating agency added that it is concerned that Veritas may face an intensified pricing environment as a result of Petroleum Geo-Services' precarious financial condition.

Veritas is conservatively capitalized at roughly 20% debt to capital as of April 30, 2002 and debt to EBITDA is likely to remain around 1.0 times, S&P said. Interest coverage measures are expected to remain strong at above 8.0x.

S&P sees Magnum Hunter sale as positive

Standard & Poor's said there is no change to Magnum Hunter Resources, Inc.'s ratings or outlook on its announcement that it will sell non-core oil and gas assets for $50 million.

But the rating agency said it considers the transaction as positive and consistent with the company's plan of reducing outstanding bank debt through the divestiture of non-core properties in 2002.

The divested properties are largely comprised of onshore oil & gas reserves originally acquired in the Prize Energy merger, S&P said. The proved reserves are 51% oil and 49% natural gas.

Proceeds from the asset sale will be used to reduce bank debt.

Fitch lowers Petroleum Geo-Services

Fitch Ratings downgraded Petroleum Geo-Services ASA including cutting its senior unsecured debt to B from BBB- and trust preferred securities to B- from BB+. The Rating Outlook was changed to Negative from Stable.

Fitch said it lowered Petroleum Geo-Services following the announcement that its merger with Veritas has been terminated.

Petroleum Geo-Services' liquidity situation, access to capital and ability to generate proceeds from asset sales are the reasons for the downgrade, Fitch said.

As of June 30, Petroleum Geo-Services had approximately $65 million of cash on hand and only $70 million available though its credit facility, Fitch said.

The downgrade of Petroleum Geo-Services' credit ratings could exacerbate its tight liquidity situation as some leases may require collateral in the form of cash, Fitch noted.

In addition to this potential cash requirement, management indicated on its quarterly conference call that it planned on refinancing roughly half of its $930 million of maturing debt through its banks and/or the high yield market, Fitch said.

Fitch said it is skeptical that management will be able to follow through with this plan given the current yield on its existing debt.

Finally, in light of the difficulty with which management has had in divesting its Atlantis assets, Fitch said it has a cautious view of future asset sales used to reduce debt.

S&P raises LIN outlook

Standard & Poor's raised its outlook on LIN Holdings Corp. to positive from stable. Ratings affected include LIN Holdings' senior unsecured debt at B- and LIN Television Corp.'s senior secured bank loan rating at BB-, senior unsecured debt at B and subordinated debt at B-.

S&P said it revised LIN's outlook based on expectations that LIN will further improve its financial profile following the May 2002 initial public offering of its parent company, LIN TV Corp.

LIN's adoption of a less aggressive financial policy that includes the meaningful use of equity to moderate the financial risk of expected acquisitions, and strengthening advertising demand were also important factors in the outlook revision, S&P said.

Following the IPO, LIN's financial profile improved to a level more appropriate for the ratings. Positive operating momentum could contribute to further financial profile improvement. However, LIN has stated its desire to be a consolidator of middle market TV stations, which could weigh on the financial profile, depending on debt use, S&P added.

Pro Forma cash interest coverage as of March 31, 2002, was above 2.0 times and total interest coverage, including holding company debt, was about 1.4x, S&P said. A 2x bank interest coverage covenant, exclusive of holding company debt, provides modest cushion. Pro forma operating company debt to EBITDA was 4.1x, compared to a 6x bank covenant, and total debt to EBITDA was 7.2x.

S&P cuts Elan

Standard & Poor's downgraded Elan Corp. and removed it from CreditWatch with negative implications. The outlook is negative. Ratings affected include Elan's senior unsecured debt, cut to B- from BB-, and subordinated debt, cut to CCC+ from B, Athena Neurosciences Finance LLC's senior unsecured debt, cut to B- from BB-, and the subordinated debt of Elan Finance Corp. Ltd., Elan Pharmaceutical Investments II Ltd. and Elan Pharmaceutical Investments III Ltd., all cut to CCC+ from B.

S&P said its action is in response to increased concern over Elan's ability to meet obligations as they come due.

The low speculative-grade ratings on Elan reflect the company's declining pharmaceutical sales prospects, significant upcoming debt maturities and other funding needs, and the uncertain value of its investment portfolio, mitigated somewhat by its still substantial cash position, S&P said.

Elan's pharmaceutical business has suffered various setbacks in the past year, including slower-than-expected sales growth of its newer products and the earlier-than-expected generic competition now facing Zanaflex, S&P added. Zanaflex, which generated $160 million in 2001, was one of the largest and faster growing products in Elan's portfolio. Elan is currently restructuring its operations, as it looks to refocus on neurology, pain, and autoimmune therapeutic areas, reduce it pharmaceutical sales force, and divest assets, including select drugs from its portfolio.

Although Elan currently has roughly $900 million in cash on-hand, the company does have significant debt maturities and cash commitments, S&P noted. The company has approximately $1 billion in LYONs securities that can be put to them at the end of 2003, and has subordinated guarantees on $840 million in off-balance-sheet debt (EPIL II and III) due in 2004 and 2005.

In addition, the company projects that it will incur cash restructuring charges of not more than $200 million over the next 18 months and plans for $250 million to $300 million in R&D joint venture funding and capital expenditures over the same period, S&P said.

The company also has contingent product payments of $164 million and an option to purchase royalty rights to other products in its portfolio for $385 million, S&P continued.

Going forward, Elan will be operating without a bank facility.

Moody's cuts Petroleum Geo-Services

Moody's Investors Service downgraded Petroleum Geo-Services ASA and kept it on review for possible further downgrade, affecting $1.8 billion of debt. Ratings lowered include Petroleum Geo-Services' senior unsecured notes, cut to Ba3 from Ba1, junior subordinated debt, cut to B2 from

Ba2, trust preferred securities, cut to B2 from Ba2, and the guaranteed first preferred mortgage notes of Oslo Seismic Services, Inc. to Ba2 from Baa3.

Moody's said the action is in response to the termination of Petroleum Geo-Services' merger with Veritas DGC.

Moody's said the downgrade reflects Petroleum Geo-Services' high financial leverage, its weak liquidity position and the continued delays in the sale of its Atlantis subsidiary.

Moody's review will look at the company's business and financial plans in light of significant debt maturities that commence in June 2003.

If the company pursues secured financing through the pledge of assets, Moody's said it will downgrade Petroleum Geo-Services' senior unsecured ratings by at least one notch.

Petroleum Geo-Services' financial leverage remains high, and the timing of the sale of Atlantis to Sinochem is uncertain at this time, Moody's said. Moody's believes Atlantis is a marketable asset, but it will likely take some time to effect its sale to another party if the sale to Sinochem were to fall through, and the proceeds could be less than $200 million.

Even if Atlantis were sold, the proceeds would not result in a meaningful reduction in Petroleum Geo-Services' financial obligations, which approximate $3 billion, including preferred stock and lease obligations, Moody's noted.

S&P upgrades Pacer

Standard & Poor's upgraded Pacer International Inc. and removed it from CreditWatch with positive implications. The outlook is stable. Ratings raised include Pacer's $150 million 11.75% senior subordinated notes due 2007, lifted to B from B-, and its $100 million revolving credit agreement and $135 million term loan, raised to BB- from B+.

S&P said the action reflects Pacer's improved financial risk profile following its June 2002 initial public stock offering.

Ratings reflect Pacer's high (albeit declining) debt leverage and exposure to cyclical pressures (especially in its logistics business), offset by a solid niche position in the transportation and logistics industry and a somewhat variable cost structure, S&P said.

Pacer has built its current business profile through a series of acquisitions that have left the company highly leveraged, S&P said. Although Pacer used the $129 million proceeds from its recent stock offering to pay down debt, its debt to capital (adjusted for operating leases) remains aggressive and is currently in the mid-70% area.

About half of Pacer's debt burden is represented by off-balance-sheet operating leases. Pacer is expected to continue to pursue acquisitions and investment opportunities in the highly fragmented logistics industry, but acquisitions should be modest in size and funded mostly out of internally generated cash flow, S&P added. Any sizable acquisitions are expected to be funded with an equity component.

Funds from operations to debt (adjusted for operating leases) was about 10% last year and is expected to improve to the mid-to-upper-teen percentage area this year, S&P said. Future operating performance is expected to benefit from cross-selling opportunities with existing customers as well as various cost-cutting initiatives underway. Debt leverage is expected to improve modestly over time, with debt to capital (adjusted for operating leases) expected to fall below 70% and remain in the 60%-70% area, depending on the timing of acquisitions.

S&P puts Alaska Communications on watch

Standard & Poor's put Alaska Communications Systems Group Inc. on CreditWatch with negative implications including its $150 million 9.375% subordinated notes due 2009 at B+ and its $150 million tranche A bank loan due 2006, $150 million tranche B bank loan due 2007, $160 million tranche C bank loan due 2007 and $75 million revolving credit facility due 2006, all at BB.

S&P said the watch placement is due to concerns that the company may not be able to achieve a low-4 times debt-to-EBITDA leverage ratio in the near term.

Alaska Communications' revenue levels and profit margins have been adversely affected by lower customer premise equipment sales, the impact of the weak economy, delays in implementation of the State of Alaska telecommunications services contract, and expenses associated with new customer-related initiatives, S&P said.

Based on the company's guidance of between $29 million and $31 million in EBITDA in the third quarter of 2002, Alaska Communications' total debt to EBITDA is likely to be in the mid-to-high-4x area for the full year of 2002, S&P said. Current ratings had incorporated the expectation that the company would be able to achieve a low-4x leverage level in the near term.

Moody's rates MedQuest loan B1, notes B3

Moody's Investors Service assigned a B1 rating to MedQuest, Inc.'s planned new $80 million senior secured revolver due 2007 and a B3 rating to its proposed $180 million senior subordinated notes due 2012. The outlook is stable.

Moody's said the ratings reflect MedQuest's high leverage and modest interest coverage and the risks associated with the company's aggressive growth strategy.

MedQuest also faces industry challenges including the potential for pricing pressures from both governmental and managed care payors, a shortage of technicians in some markets, a competitive operating environment and the capital intensive nature of the business, the rating agency said.

Rating positives include the company's leading local market positions, a proven business model, strong operating trends and favorable demographic and industry volume trends, Moody's added.

Additionally, Moody's said it considers management's level of experience and their long history with the company (since inception in 1993) a credit strength.

Moody's said the stable outlook reflects its expectation of continued growth in revenues and cash flow, though at a more moderate pace than in recent years.

Growth will be driven by a combination of an increase in same store volume, facility expansions, de novo projects and small acquisitions, Moody's said. The declining trend in price per scan, and the impact this may have on margins, remain a concern. However, Moody's said it believes that the adverse impact could be partially mitigated by the growth in volume and, given the company's ample utilization capacity, an improvement in operating efficiencies.

Also incorporated in the outlook is an aggressive strategy going forward, with free cash flow used primarily to fund the company's expansion, Moody's said.

Moody's confirms Veritas

Moody's Investors Service confirmed Veritas DGC's ratings and kept them on review for possible upgrade including its $135 million 9¾% senior unsecured notes due October 2003 at Ba3.

Moody's said the confirmation follows the terminated of Veritas' proposed merger with Petroleum Geo-Services ASA.

Moody's said its review will examine Veritas' business and financial strategies as a stand-alone entity going forward, including Veritas' capital spending and multiclient investment plans relative to expected cash flow generation and its refinancing strategies for its credit facilities maturing August 2003 and notes due October 2003.

Veritas' ratings are supported by its solid market position as an international provider of land and marine seismic services; moderate leverage; disciplined corporate finance practices that have been compatible with the cyclical, technical, and investment risks of its business; and its track record of sustaining solid financial flexibility during cyclical downturns, Moody's said.

The ratings are limited by Veritas' business concentration in seismic, intense competition in the sector, exposure to cyclicality, and rapid evolution of technology, Moody's added.

Moody's lowers Duane Reade outlook

Moody's Investors Service lowered its outlook on of Duane Reade, Inc. to stable from positive and confirmed its ratings including its $183 million secured credit facility at Ba2 and $381 million 3.75% cash to zero senior convertible notes ("CATZ") due 2022 at Ba3.

Moody's said it revised Duane Reade's outlook outlook because the economic slowdown in and around New York City has measurably impacted front-end sales.

But Moody's added that it expects that operations and financial measures likely will remain appropriate for the current ratings over the next 12 to 18 months.

S&P cuts Alestra

Standard & Poor's downgraded Alestra S de RL de CV and removed it from CreditWatch with negative implications. The outlook is negative.

Ratings lowered include Alestra's $270 million 12.125% notes due 2006 and $300 million 12.625% notes due 2009, both cut to CC from CCC+.

S&P lowers PG&E National

Standard & Poor's lowered PG&E National Energy Group Inc. and put its on CreditWatch with negative implications.

Ratings lowered include PG&E National Energy Group's $1 billion 10.375% senior unsecured notes due 2011 and $625 million revolving credit facility tranche A due 2003, both cut to BB+ from BBB, Attala Generating Co. Inc.'s $258 million pass-through certificates due 2023 and GenHoldings I, LLC's $1.698 billion senior secured bank loan due 2006, both lowered to BB+ from BBB-, PG&E Gas Transmission-Northwest's $250 million 7.1% senior notes due 2005 and $150 million 7.8% senior debentures due 2025, both lowered to BBB+ from A-, and USGen New England, Inc.'s $100 million unsecured credit facility due 2003 and $413.643 million pass-through certificates, both lowered to BB+ from BBB.

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